Jerusalem: Israel`s Prime Minister on Wednesday proposed a 10-month freeze on new West Bank settlement construction in what he said was an attempt to jump-start Mideast peace talks.
But the Palestinians rejected the proposal before it was even formally unveiled, saying it was unacceptable because it did not include east Jerusalem.

Israeli construction in settlements in the West Bank and east Jerusalem has been a key sticking point in U.S. efforts to restart Mideast peace talks. The Palestinians say they will not return to the negotiating table without a complete halt to construction in both areas, which they claim for a future independent state.

There was no immediate reaction from the United States.

The Israeli announcement came amid signs of trouble in negotiations to arrange a prisoner swap with the Palestinian militant group Hamas. Officials with Hamas said that Israel was objecting freeing some of the militants it wants in exchange for a captive Israeli soldier. Both sides have hinted of progress in recent days, raising speculation that a deal was imminent.

Prime Minister Benjamin Netanyahu was expected to discuss both the settlement freeze and the prisoner talks with his Security Cabinet, a small gathering of senior Cabinet ministers and top security officials.

The group was expected to vote on the settlement proposal later Wednesday.

"It`s not a simple step, not easy. But it has far more advantages than disadvantages," Netanyahu said at the beginning of the meeting. "It allows us to present before the world a simple truth: The Israeli government wants to enter negotiations with the Palestinians, is taking practical steps to enter negotiations and is very serious about its intentions to promote peace."

At least one key Security Cabinet member, Defense Minister Ehud Barak, came out in favor of the proposal. "Its aim is to open a window for renewing negotiations with the Palestinians," he said.

Israel has been under heavy international pressure to halt its construction in settlements built on captured lands claimed by the Palestinians. Some 300,000 Israelis live in the West Bank, in addition to about 180,000 people living in Jewish neighbourhoods in east Jerusalem.

Netanyahu already has promised not to build any new West Bank settlements, and he has floated the idea of suspending construction in existing ones. Wednesday`s offer was the first time he has given a firm timeline for how long he is willing to stop the building.

The offer, however, appears to have key limitations.

Netanyahu, a traditional ally of the settler movement, has argued that some construction should be permitted to allow for "natural growth" in their communities. His latest offer applies only to "new construction permits" — meaning that some 3,000 homes already approved for construction would not be affected.

More critically, it did not make any mention of east Jerusalem. The competing claims to the eastern part of the city — home to sensitive Jewish, Muslim and Christian holy sites — is the most intractable issue in the Israeli-Palestinian conflict.

Israel considers all of Jerusalem its eternal capital, and Netanyahu has repeatedly said he will not agree to share control of the city.

Netanyahu`s announcement had been rumoured for days. Ahead of his announcement, Palestinian presidential adviser Nabil Abu Rdeneh said the proposed freeze would be unacceptable if it didn`t include east Jerusalem.

"Any Israeli offer that doesn`t include Jerusalem will be rejected immediately," he said in a phone interview from Argentina, where he was traveling with President Mahmoud Abbas. "No Palestinian, no Arab can cross this line."

Israel`s proposed settlement freeze appears to be aimed in part at boosting Abbas in his rivalry with Hamas militants, who are poised to claim a major victory if they can secure a prisoner swap with Israel.

Hamas says the swap shows that its violent tactics are far more effective than Abbas` attempts at diplomacy. Hamas has ruled the Gaza Strip since ousting pro-Abbas forces in June 2007. The Western-backed president now controls only the West Bank.

Hamas is seeking the release of hundreds of Palestinian prisoners in exchange for Sgt. Gilad Schalit, a soldier it captured in a June 2006 cross-border raid. After years of fruitless negotiations mediated by Egypt and more recently Germany, both sides have signalled they are close to agreement.

But on Wednesday, Hamas officials said the talks had hit a snag over some of the top militants the Islamic group wants freed and a deal is unlikely in the coming days.

Khalil al-Haya, a Hamas leader in the Gaza Strip, blamed Israel for the delay. He told a local news Web site that Israel "has not yet responded to the demands of the factions holding Gilad Schalit."

Israel is objecting to some of the names put forward by Hamas, a senior official of the militant group familiar with the negotiations told.

He said the German mediator shuttling between the sides has presented an alternative list of names provided by Israel, and Hamas leaders were studying it.

The official spoke on condition of anonymity because the talks were ongoing. Israeli officials, also speaking anonymously, said they did not expect a breakthrough in the coming days.

Neither side would discuss which names were holding up the deal. The London-based Arabic daily al-Hayyat said the dispute was over three senior Hamas militants serving multiple life sentences for masterminding suicide bombings in Israel.